Why Venture Capital has set its sights on Manufacturing

There are VC’s circling Manufacturing like hungry sharks

And there’s blood in the water that will only attract more of them soon.

“VC” is short for Venture Capital or Venture Capitalist.

Before running CNCCookbook full time, I was a venture capital-funded entrepreneur working in Silicon Valley.

I was pretty good at it too. I participated in 7 startups, and achieved several big exits. As a result, I got to know a bit about how Silicon Valley Venture Capital thinking works.

Lately, Venture Capital is circling Manufacturing. It’s sizing up the market, looking to see if there is an opening for their style of business.

I was even approached by one group of VC’s to help evaluate a Manufacturing Deal. This sort of “Termite Inspection” as I like to call it, is something I used to do often in my prior life.

To make sure the record is straight, CNCCookbook is not a venture capital deal. In fact, we’ve taken no outside capital whatsoever. I’m interested in Manufacturing too. Let me be your guide to how VC’s will approach manufacturing. I will show you how their plans could completely change how this business works.

The first thing to know is they’re already here and have been for a little while. They’ve made some investments already. I finally decided it was time to write this piece after reading about Fictiv’s $15M Series B investment to create a Manufacturing “New World Order” via their On-Demand Platform.

This brings Fictive’s funding to a total of $25M–no small change. The latest round brought in names like Accel, Intel Capital, Bill Gates, FJ Labs, Tandon Group and the Stanford-StartX Fund. These folks are serious and they’re jumping in with another $15M because Fictiv has shown promise with that first $10M.

Yes folks, Venture Capital Deals are always fully buzzword compliant (hence that “On-Demand Platform” business) and they always shoot for the Moon. It’s not enough to create a successful manufacturing business. A great VC Deal has to create a “New World Order” by disrupting the one that’s already there. And that disruption often works. It’s why so many bricks and mortar businesses are under Amazon’s thumb.

If you don’t want your Job Shop or Manufacturing business to wind up under the thumb of these gorillas, keep reading.

What are VC’s Looking for and why Manufacturing?

Make no mistake about it, VCs want BIG opportunities. They’ve raised gigantic funds and they’re only interested in billion dollar opportunities. Creating a nice little $100 million dollar a year company is something they will regard as cute, but missing the point. Think of Gordon Gecko (Mr. Greed is Good from the movie, “Wall Street”) as an absolute piker by comparison.

They can only find this kind of success when there is an opportunity to disrupt (their word for “take over completely”) an existing market with new technology. This model has worked well for them:

Each of these markets was gigantic, but the VC World has an insatiable appetite. They’re always looking for the next big thing to disrupt. And now Manufacturing is starting to look juicy. It is big. Changes are afoot that makes it attractive to reshore in the US and elsewhere. The technology exists, albeit not completely yet, to add an element of disruption.

Plus, the Manufacturing world has a number of distractions. There’s a talent shortage driving more automation. The offshoring thing is in flux as prices equalize and hidden costs of shipping work overseas have become better understood. And there’s no end of cloudy confusion about the whole Additive Manufacturing (3D printing) thing.

VC’s love a certain amount of confusion in a big mature market. It’s like a smoke screen that lets them get an established beachhead before an effective defense can be mounted.

Plus, there is an existence proof. It’s a real doozy and others are coming along. The existence proof that it’s possible to disrupt manufacturing comes from a company called ProtoLabs.

ProtoLabs: The Existence Proof (aka The Chum in the Water)

For VC’s, having an Existence Proof is a big deal. It shows there is a real market. The Existence Proof doesn’t survive when the VC’s show up and do things one better. Fairchild was Intel’s Existence Proof. MySpace was Facebook’s. AltaVista or perhaps Yahoo Search were Google’s Existence Proofs.

In 2017, they had 1000 employees and did $344.5 million in revenue. As I write this today, the company is worth $3.26 billion on the New York Stock Exchange. As an Existence Proof, with VC’s figuring ProtoLabs is MySpace and their Manufacturing investment can be Facebook, the numbers all work out to be very, very, BIG.

Here’s the thing to remember as you’re thinking about ProtoLabs:

ProtoLabs is nothing but a Job Shop with a nice low-friction RFQ process. You send a CAD model, and you get back a quote quickly and painlessly.

How many Job Shops are publicly-traded companies? How many are this big and succesful? And how many are worth $3.26B?

It’s amazing, really. And the problem that ProtoLabs has solved, the thing that has made them so valuable, is a problem I’ll bet most Job Shops don’t even think much about.

ProtoLabs has taken the friction out of the RFQ process.

They’ve made it painless. In exchange, you’ll discover as I did when I tried he service, that they charge a large premium to manufacture the parts. Isn’t it interesting that customers hate the purchasing process so much they would pay that kind of premium?

What Kinds of Opportunities have the VC’s invested in so far?

Actually, the VC’s have invested in quite a few opportunities already.

Manufacturing Marketplaces

First, they’re investing in Manufacturing Marketplaces. These are online operations that match buyers with makers, and there are a bunch of them:

This is an interesting batch of companies. I attempted to do a survey about them last year. The response was so negative that I decided not to publish. Nearly everyone that participated who had tried these marketplaces said they were money losers. The bidding was so fiercely competitive they never could make a dime.

It’s interesting that I hear much the same complaint about online retail from the bricks and mortar world. The Internet reduces friction and that’s one thing these marketplaces do in spades. It doesn’t mean you can’t make money there, but you better show up with your bidding pencil razor sharp as the players are taking no prisoners.

Front End + Manufacturing or Marketplace

Companies like eMachineShop and Fictiv add a slick front-end to the RFQ process. They may do the manufacturing themselves, or they may farm it out to a network of “member” job shops. These front-ends further refine and simplify the task of getting a bid. They may even include simple CAD functionality.

Pans and Blue Jeans for the Miners

These first two are categories that want to own the storefront. In VC parlance, they’re trying to disintermediate the traditional RFQ process by coming between manufacturers and their customers.

So there can be no doubt, let me say it again:

These companies want to come between you and your customers so that they control the customers.

The other approach is to build the tools to help any company hop on this new bandwagon. This can work well, albeit sometimes at a smaller scale than the full boil-the-ocean approach. The ultimate in this category would be a piece of software any Job Shop could purchase that would let them hang out an online shingle so their customers could go through the RFQ process in a manner similar to ProtoLabs, Xometry, or Fictiv.

“What’s the difference?” you may be wondering. Well the difference is control. Control for the future. Suppose you let these Manufacturing Marketplaces completely take over the RFQ process. You no longer know your customers at all. Instead, the networks own that relationship. You’ll be marginalized just as retaillers that only sell on Amazon are marginalized.

You really don’t want that to happen, but to avoid it, you must maintain your relationship with your customers. Read my article over on my entrepreneurship blog to learn more about this and Silicon Valley’s 5 Step Get Rich Quick Plan that you must avoid being a victim of.

One of the biggest VC tool plays so far has been OnShape, which is a Cloud CAD company started up by the original founders of SolidWorks. They have a huge amount of capital, and their first job is winning as a credible CAD player. But they could still play a role in this new vision of Manufacturing.

What is the VC Vision for Manufacturing’s Future?

Okay, let’s try to put all of this together, dig out our crystal balls, and ask what Manufacturing’s Future might be in 5, 10, or 20 years, depending on how quickly they can move.

First thing is they will eliminate the friction associated with getting parts made. You’ll be able to send a CAD model and get back a quote very very quickly. There are already some companies that make that a reality today, but it will be ubiquitous in the not too-distant future.

Second is manufacturers will manage a part from RFQ to Invoice in a completely automated, paperless, and online way. This is all about connecting together what is today a piecemeal inbox-to-outbox-to-the-next-inbox process. Putting all this into software will reduce costs and increase service levels. It won’t radically change how we do business, but it sets the groundwork for future faster and more radical change by getting everything into data and off of paper.

The last step is that Data and Analytics along with further Automation will relentlessly tighten down the efficiency of Manufacturing.

Taking the friction out of manufacturing will make it more efficient, and it is that efficiency (manifested as lower costs) that will disrupt the Manufacturing status quo. At least that’s what the VC Game Plan hopes for.

How can your Shop prepare for this Future?

There are levels of preparedness that will determine how well you compete in the New World Order. Some of you are shaking your heads. You don’t believe it, you won’t believe it, and so you won’t even try to embrace it.

That’s fine–change will come. It may or may not be in this form, but my gut says this is all possible and that there will be tremendous economic forces driving it. If you’re not prepared for it, you run the risk of being a casualty of the changes. We saw plenty of those during the dot com revolution, so think twice before choosing to ignore the gathering storm clouds on the horizon.

Level 1: Online RFQ Process

Start with the front-end and ask yourself:

How easily can someone send a CAD Model and get a quote back from us?

And some sub-questions:

Can customers do this online? Is it easy? Does your web site guide new visitors through the process? Are your existing customers happily using the system today?

Is your quoting process fast, paperless, reliable, and scalable?

Are you set up to market this kind of service online to drive prospects to submit RFQ’s?

For the next 3-5 years, it’ll be a tremendous competitive advantage if your shop can operate this way. After that, it will be a competitive disadvantage if you can’t.

Make it a priority this year to start improving your quoting process. Check out our recent survey and data on how your peers are quoting for starters. Making your quoting process frictionless will be the second hardest part of the transition, and the most crucial from the standpoint of the customer’s first impression. Don’t wait to start improving your quoting process!

Level 2: Integrated Online RFQ to Invoice Process

Level 2 is unfortunately going to be one of those 3 blind men and the elephant stories. ERP companies will tell you they’ve already solved the problem for you. Just sign here and hand over the check. Others such as Job Cost Estimation and Quoting Software will claim to have solved parts of the problem.

But the reality is that this is a brave new world. It’s possible the existing players can morph to it, but it’s equally if not more likely that something new, built from the ground up to embrace the new vision, is what will be needed.

You certainly can create the semblance of Level 2 with off-the-shelf software–end to end online processing from quote to invoice is possible. For the most part it’s good, but there are two reasons why it falls short.

First, most quoting software is horrible. You told us that when you responded to our survey on the subject. The two biggest issues are that it is extremely inaccurate and that it is also time consuming. If the rfq-to-invoice software includes such a quoting package, you’ll need to figure out how to augment it with something better.

Second, most existing software doesn’t collect comprehensive enough information to implement Level 3. For the most part, it just isn’t that savvy about manufacturing processes. Speeds and Feeds? Forget about it. What that means is that you can create a system from today’s software, but you’re going to have to seriously modify (e.g. Bandaid it!) it to gather the right info to feed Level 3.

We won’t know what the optimal solution for Level 2 is until we get a ways into Level 3. There we will discover whether the solution created at this stage is comprehensive enough drive Level 3 to success. It may be that we run parallel processes. One set of software gathers the correct information while the other manages the workflow on the Shop Floor.

Level 3: Efficiency through Automation and Data Analytics

This is going to be the hardest transition of all, and the one most will fail at. The reason is that there are very few people making software for Manufacturing that understand machining and what happens on the Shop Floor.

That problem where the Engineers hand you the drawings for parts that are impossible to manufacture? Everyone on the Shop Floor has experienced it at one time or another. But it happens in spades with Manufacturing software.

To realize this vision at its highest level, consider tool life. It’s something that gets bandied about as if we know what the life of a tool will be. But, by and large we don’t, and it’s very hard to predict. One of my competitors has a Feeds and Speeds Calculator that purports to do so, but it’s smoke and mirrors.

Think about what you really have to know and track to understand tool life:

You need to know all the jobs a given tool was run on.

For each job, you will want to know what the tool did. What rpm and feedrates? What cut width and depth? What material was being cut? How much tool deflection was there? How long was the tool in the cut? How far did it travel through the material?

Any special conditions (e.g. that machine over there will need a spindle rebuild soon and it has a lot of runout)?

Given all that in a database, you can start to understand tool life on an active Shop Floor and be able to use it to increase the efficiency of your operations and the accuracy of your quotes.

Once you understand tool life, you can begin experimenting with increased feeds and speeds. You will find that some machines can go faster than others. Some jobs can run faster than others. Some operators, even, may be able to run faster than others. Once you know all that, you’ll look for patterns that increase your efficiency.

Now, does your current ERP software come close to tracking even a fraction of that sort of thing? None do, and that’s why it will be something new that comes along to do that job.

It’s all about the Data you collect and your ability to analyze it for valuable insights. This has worked well for a great many disciplines and industries, and in this vision, Manufacturing is next. In fact, we already talk about it under the guise of Industry 4.0.

Constant: Competition is Coming and it’s Tougher than Ever!

Remember my mention of Manufacturing Marketplaces and how so many wanted no part of them because they were too competitive?

Well, strap your seat belts on because the Internet will bring that competition to you. Why do customers stick with the same suppliers once a deal is struck?

There are two reasons:

The purchasing process is full of friction and painful as heck. This Manufacturing New World Order wants to fix that problem first.

Once you’ve found a supplier you can rely on, it’s risky and expensive to go out and search for another. Here again, the Manufacturing New World Order will find solutions to that problem. Traditionally, the online world relies on reviews and reducing friction on learning about the experience of others with your firm to solve the problem. There will be Yelp for Manufacturing where customers talk about their experiences with various shops, both happy and unhappy.

What that means is that as this New World unfolds, it will become harder and harder to hide from it. They’re bent on reducing all friction so that customers can easily slide over to their companies. Resistance is futile, competition is inevitable.

But what else is new? You’ve been through years of brutal cutthroat price competition with offshore manufacturers. You can handle this if you’ve a mind to. The important thing is not to slack off on the pace of innovation and change at your shop. Keep increasing your efficiency every chance you get. Move to the front of the pack and don’t relinquish your spot.

Where is CNCCookbook in all this?

It should come as no surprise when you think about our product offerings that we’re all over this new vision for Manufacturing. But, rather than chasing the tail of what’s happening today, we’re aiming for where the puck will be. That’s right, we are intensely focused on Level 3 and we’ve made a lot of progress there.

We’re assembling a complete Shop Floor Suite that will exchange all forms of pertinent data to get you valuable answers to change your Manufacturing business. Our G-Wizard Calculator and Editor already handle a great deal of extremely valuable Level 3 data such as Tool Tables, G-Code, and your Feeds and Speeds. G-Wizard Estimator, currently free during Beta Test, will get the front end and Level 1 going strong with quotes. And G-Wizard Shop Floor, which we’re a touch secretive (call it over protective even) is our answer for Level 2.

We’re also looking at the potential for API’s and Integrations with our various packages and other software including CAD, CAM, and more.

It’s all coming together at a reasonable pace for us and with lots of input from you as we release various tools for Beta Test. Stay tuned and we’ll keep you posted on this unfolding story.

4 Comments

Bob…….disruptive technology, whether it be hardware or software, always starts small because it has to. It sees a new opportunity and will probably not make a lot of money in the beginning. That is why the billion dollar company won’t see the disruption coming. Wise VCs will invest in the disruptive efforts knowing they will be the new game in a short while. Only looking for the billion dollar game is foolish. Being aware of the million dollar investment that moves to a billion dollar company….like your Protolabs example…..is where the careful VC insight needs to be placed.

Your comments regarding who is in control are very insightful. Gaining control has been around since Adam and Eve – believe it or not – and will always be a key driver in business success. Leveraging the control will guarantee success even for the small shop, and disrupting the current controllers to gain significant market share is where the creative folks will always focus…and win.

This has always been an ever changing landscape. That is what disruptive technologies are all about. They keep the landscape green and fruitful. And yet – as you point out – things are changing.

Your insight into the power of the internet is spot on. The internet has the potential to bleach the landscape into a monochromatic controlled system…….for everyone.

Like Lee, I am too old to be very involved in this…but it gets more amazing every day as I watch it unfold.